5 Problems IBP will solve

Onive Consulting | IBP problemen

A good alignment between Sales and Operations is in place. Supply is in balance with Demand. Your business is planned pro-actively on operational level. A part of the mountain of business planning is realised. This might be the right moment to focus on value creation for your company. With Integrated Business planning you can realize the next step. In this article you can read what problems can be solved with Integrated business planning.

Problems with P&L prognoses

Most companies produce rolling P&L forecast periodically. In most cases performed by the finance department. Execution consists of an employee of the finance department collecting data from throughout the company, this employee consolidating the numbers using a number of conversions and presenting the result with his/her manager.

This picture often looks very different than the period before. Consequently the employee follows the same route as before, but now to try and understand the deviations.

These problems are a symptom of a number of underlying issues:

  • There is not one owner of demand (or supply)
  • Demand is expressed in different units of measure and at different levels of aggregation
  • There is no systematic process for evaluation and validation. There is little insight in the building blocks of the demand, causing lack of insight in changes to the demand

A demand meeting is a mandatory part of the IBP process. This meeting (and with it the demand) has a clear owner. This owner ensures the different building blocks of the demand are consolidated; in order to do that efficiently he/she ensures clear agreements about units of measure and level of aggregation. Once consolidated by the experts in the organization (from all departments), the forward demand is confirmed in the demand meeting by the owner. This meeting also features a structured review of the changes of the forward demand vs the previous period. Finally, the demand is ‘translated’ into the language of the business ambition, usually €, which makes the P&L prognoses a piece of cake!

Problems with inventory control

Inventory means different thing to different departments of the company. For finance it means working capital , for production it is the key to batch-size and production frequency, for sales it is the guarantee to get product on shelf and for supply chain it is a variable to use in creating plans. These meanings are not only different, they are also largely contradicting. Balancing these interests is very complex. Because the reduction is a priority for many companies, the decision is often made to reduce inventory in an uncontrolled manner. The consequence is invariably issues with service level.

What goes wrong here is a lack of control. A well chosen balance between cost, stocks and service level is required to make the right decision. The ideal inventory level is not fully a choice, but both a consequence of strategic choices; desired stock level and production frequency (=production costs) and of the variability in demand (forecast accuracy) and supply (manufacturing reliability). Where IBP helps is the translation of business ambition into the ideal inventory level. This could be, depending on strategy, differentiated by product group.

Decisions are made in the monthly IBP meeting by the P&L owner. Once the targets are set, targeted improvements can be made to reduce the variability to reduce stock levels in a controlled manner, without impacting customer performance. Monitoring inventory vs target and variability vs target as well as the progress on the improvement plans are all cone in the IBP meeting.

Problems linking volume to financial targets

Companies that have made the step to implement S&OP have good control over their demand. Every month they have a pretty good idea how they outlook stacks up against target. This equally goes for operations and for sales. People working in sales often have sales targets, that carry significant bonuses. In order to reach these targets, at the end of the month/quarter/year often big sales pushes are done, selling product at discount. This often leads to volume/turnover targets to be met, but in doing so profitability targets to be destroyed. The problem is that volume and financial targets are not in sync.

The IBP process does not talk volume, it talks value. Every month the outlook of profitability against target is reviewed, not just volume. Consequence is that surprises at the end of a period are avoided.

Problems with department targets contributing to business ambition

When a business has an ambition to grow or improve profitability, it ‘translates’ this ambition to its different departments and gives their leaders this translation as targets. This looks something like this:

  • Sales +5% volume (or €turnover) vs last year
  • Manufacturing -5% production cost per unit vs last year
  • Purchasing -5% cost per unit vs last year
  • Supply Chain -5% stock vs last year and -5% logistic costs vs last year

The department leaders get to work with their teams and generate plans to realize these targets. At the end of the year some of these teams do not meet their target and the company does not realize its ambition. What happens here is that the department plans are contradictory. Purchasing plans to reduce costs by buying in larger lots, which increases inventory; manufacturing reduces costs by reducing production frequency, which also increases inventory, but also negatively impacts service level and responsiveness, which impacts the ability for sales to reach their target. Sales responds by planning last minute promotions, which increases logistic costs due to unplanned transport. Many more examples could be added. The result is not only that the company does not realize its ambition, but the management team (the leaders of the departments) become each other’s competitor.  And even worse, they start to behave as such.

When IBP has been implemented successfully, the business ambition becomes leading. The leaders of the departments need to contribute to this ambition. Every month decisions are proposed to advance towards the ambition and are evaluated for full company impact. Every month in the IBP meeting the company’s latest outlook is compared with the ambition, leading to targeted decisions for improvement.

Besides the fact that the business ambitions are most likely achieved, IBP has 2 additional positive effects:

  • Departments have an incentive to collaborate where before they had an incentive not to, leading to improvements no department could achieve on its own
  • Because reaching targets is no longer a win or lose battle, employee satisfaction increases and the office atmosphere becomes more positive and constructive.
Problems with innovation/new product introduction

Innovation is important for the company’s continuity and its ability to achieve long term goals. The competition changes every day and the current portfolio will not be competitive ofrit does not change with customer preference. That is why companies regularly launch new or improved products. In our experience this comes often with a lot of inefficiencies:

  • Empty shelves, because of lack of flexibility to respond to higher than anticipated sales of the newly launched product
  • Empty shelves in the weeks leading up to the introduction of the new product, because the launch timings do not match inventory and sales levels of the old product
  • High, unsaleable stock, caused by a lack of responsiveness, when new product sales are lower than anticipated.

On the surface, this is a planning problem, solved with more attention. However, there are 2 underlying problems:

  • The launch project is insufficiently connected to the daily execution
  • The project itself is not an integral part of the mid-term demand

The horizon in the IBP process is up to 24 months. New products are an integral part of this business outlook. This makes launch projects not only part of the strategy, determining strategic fit, but also part of the demand. This leads to all departments being able to review for fit and to assess ability to execute. Because of the hot spot 3-5 months ahead, projects are pulled into the execution in a timely and efficient manner. All knowledge and expertise in the organization is then used to make the project a success.

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